Thursday, September 15, 2011

Emerging Market Equities or Treasury Bonds?

GMO is one of the most respected money management outfits in the business.

Managing over $100 billion for largely institutional clients, GMO is well-known for its disciplined and thoughtful approach to asset management. Its chief investment is Jeremy Grantham, who writes one of the best quarterly investment pieces (other than available on Random Glenings, of course!).

So it was with some interest that I saw this quote on Bloomberg from Ben Inker of GMO, who does some of GMO's asset allocation work:

With the likely returns for Treasuries so low, Inker believes that emerging-market stocks are actually less risky than Treasuries for long-term buy-and-hold investors. Emerging-market stocks, which have sold off sharply in 2011, will be the best-performing sector, he predicts. Inker expects such stocks to produce annual inflation-adjusted returns of 6.5 percent. The downside is that they may be much more volatile in any given year.

"Emerging-market stocks now have higher dividend yields than 10-year Treasury bonds and their earnings are growing," says Inker. "Over 10 years, the odds of emerging markets losing to Treasuries are very, very low. But it's going to be a scary ride."

I'm not sure I'm ready to swap bonds for emerging market stocks, but it does present an interesting counterpoint to conventional wisdom.

After all, I doubt that three years ago I would have believed that Europe would be turning to China and Brazil to help with their banking crisis, but that seems to be the case. The emerging markets countries have amassed a huge sum of foreign capital, and now are in a position to help their profligate trading partners in Europe and North America.